ISAs and Investment Funds

2. Cash ISAs (and TESSA-Only ISAs)

A cash ISA operates in exactly the same way as if you were putting money into a savings account that pays interest (the difference being. with an ISA, you don't pay tax on the interest).

The limit for contributions to a cash ISA is £5,760 for the 2013/14 tax year.

Some cash ISAs can be opened with as little as £1, but others require more substantial amounts and are primarily designed to attract people who already have a number of years' worth of cash ISAs and who are looking for a better rate.

Beware the teaser rates

Obviously, when you first open a cash ISA, you'll look for one that has a competitive interest rate. As with ordinary savings accounts, many offer bonus rates to attract new business that typically only last for 6 or 12 months. You can also get variable rates as well as ones that are fixed for a year or even longer.

ISA rates tend to be more seasonal than mainstream savings account, however. Sometimes you'll find that the rates on offer don't compare that well with ordinary savings accounts, as the banks and building societies save their best offers for the March/April/May period, which is when most money tends to be put into cash ISAs.

Play the transfer market

As time passes, you're likely to find that the rate you get on your cash ISA doesn't compare very well with the products being offered to new customers. So it's important to vote with your feet and move your money to another ISA provider if the gap gets too large. Make sure you don't close your original account when you do this though, as you'll lose the tax protection for the money held in your cash ISA.

It's worth bearing in mind that the transfer of cash ISAs can take quite a while to be completed, particularly if there is a lot of demand for the ISA you're transferring to. So it pays to be persistent and follow up your application if needs be.

TESSA-Only ISAs

Finally, a note on these now defunct accounts. TESSAs were essentially the forerunners of cash ISAs and ran from 1991 to 1999. Many people kept their savings in TESSA-Only ISAs from 1999 onwards, continuing to enjoy tax-free interest.

As of April 2008 though, all TESSA-Only ISAs have now been classified as cash ISAs. The awkwardly named TESSA-Only ISA (TOISA) has ceased to be.